Directors and officers (D&O) have faced unprecedented risks and liabilities in recent years. The effects of the COVID-19 pandemic, aggressive regulators, and ESG (environmental, social, and governance) issues continue to shape today’s risk environment. This evolution of the risk landscape places D&Os under heightened scrutiny from their stakeholders, making D&O Insurance a must-have for companies.
While D&O Insurance can protect the assets of business owners and managers from lawsuits, it can’t cover everything. Learning about what the policy includes and excludes can go a long way to ensure that businesses have no gaps in their coverage. This article provides a comprehensive overview of the most common D&O Insurance exclusions and claims.
What Are Insurance Exclusions?
Insurance exclusions are cases, events, or accusations not covered by a policy. Exclusions narrow the scope of an insurance policy by excluding some types of risks, allowing providers to define when an insurance coverage applies and when it does not.
Most insurance policies offer broad coverage. Exclusions can help define a policy’s coverage more accurately by eliminating unnecessary coverages and focusing on high-risk exposures. This can help businesses manage their risks better and assist brokers in helping them carve a policy that matches their needs. For this reason, it is crucial to understand common D&O Insurance exclusions.
What Does D&O Insurance Cover?
Before learning about D&O Insurance exclusions, let’s briefly dive into D&O Insurance and what it covers.
D&O Insurance coverage intends to protect business directors and key managers from personal losses if employees sue them, vendors, investors, customers, or other stakeholders for alleged wrongful acts while managing the company. This policy can also compensate for legal fees and other costs an organization will incur due to the suit. Directors and officers can be sued for different reasons related to their managerial roles, including the following:
- Breach of Fiduciary Duty
- Misuse of Company Funds
- Lack of Corporate Governance
- Failure To Comply With Workplace Laws
- Poaching of Competitor’s Customers
- Theft of Intellectual Property
D&O Insurance can take different forms and have varying inclusions. Depending on how an organization configures its D&O policy, this coverage can protect company leaders from the expenses of the allegations mentioned. Brokers can help their clients choose a policy that addresses the company’s unique exposures.
What Is Not Covered by Directors’ and Officers’ Insurance?
Now that we understand D&O Insurance and what it usually covers, let’s look into the most common D&O Insurance exclusions. For companies, it is critical to remember that certain exclusions are more prevalent in some policies than others, so it is important to review the D&O policy wording to ensure clients can get the coverage they need.
1. Breach of Contract
A contract breach happens when a company’s officers fail to comply with a signed contract. These contractual obligations are accepted voluntarily and are not imposed by law. Therefore, when a company breaks a contract, it is viewed as an intentional act. As a result, it does not fall under a D&O policy.
2. Insured vs. Insured Exclusions
Insured vs. insured exclusion in D&O refers to circumstances where one company director sues another director in the same company. D&O Insurance is meant to defend an insured individual for their conduct rather than fund their action against others. This exclusion also prevents companies from suing their directors to collect insurance proceeds.
3. Major Shareholder Exclusion
This D&O Insurance exclusion removes coverage for claims made by individuals with a large percentage of the insured company’s stock (more than 15%). The rationale behind this exclusion is to eliminate any incentive for infighting between the management and its shareholders and to encourage major stakeholders to be proactive in staying informed of their investments.
4. Claims Covered by Other Insurance
Businesses typically have broad insurance portfolios. Suppose a case falls within the coverage of another insurance policy, such as property damage or bodily injury usually covered under General Liability policies. In that case, it will not be written into D&O Insurance.
5. Personal Gain
Directors and officers of an organization are expected to act with a duty of loyalty, even according to an insurance policy. This duty entails not engaging in any actions or activities for personal gain that can damage the company. As a result, claims related to personal profit or advantage are not covered.
6. Defamation, Libel, and Slander
D&O Insurance does not protect managers and leaders from defamatory speech that others may interpret as damaging, leading to lawsuits. Typically, this happens in the context of employee termination or through official company newsletters and commentaries.
7. Conduct Exclusions
Every industry sector has regulations and laws it must uphold. Directors and officers are expected to comply with these standards. Failing to meet them due to negligence or intentional misconduct is not covered under a D&O policy. This also includes any act of deliberate fraud or criminal activities.
D&O Claims Examples
The right D&O policy can help businesses mitigate their liability risks and provide the management peace of mind should something in the organization go wrong. Here are some of the claims examples where D&O Insurance can be helpful.
Claims from Regulatory Authorities
In today’s business landscape, organizations are expected to comply with health and safety regulations in the workplace, statutory accounting, tax provisions, and other regulatory requirements. D&O Insurance can cover legal costs related to a regulatory inquiry.
Let’s take this as an example. A company manager receives an inquiry from a governmental authority overseeing the annual registration of his company accounts, suggesting that he submitted incorrect information. D&O Insurance can cover the cost of assistance consultants provide to show that no such breach occurred.
Claims from Employees
Employees allegedly discriminated against or who had their employment terminated can file personal claims against managers or directors of the company. For example, a female employee was terminated for poor performance and sued the directors for wrongful termination based on gender discrimination. The case went to court, and the company won the case. The D&O coverage will compensate for the legal fees.
Claims from Stakeholders
Stakeholders of the company, such as administrators and creditors, can file lawsuits against directors due to bad company performance or insolvency. Stakeholders seeking to recoup their losses might scrutinize the decisions and actions of directors. D&O Insurance can cover directors and officers at a certain time frame following their departure from the company or after its insolvency.
Help Your Clients Address Their D&O Exposures by Partnering With ProWriters
The evolving business landscape has created new exposures and vulnerabilities for company decision-makers. While an insurance policy can help them mitigate these risks, they must understand D&O Insurance exclusions and coverages to choose the right policy. As a broker, you can help them accomplish this.
At ProWriters, we understand the unique role that brokers play in helping organizations navigate their exposures. We provide the best tools, resources, and packages to help you become the D&O Insurance expert they trust. Reach out today to learn how we can make a difference in your services!